A Decision Analysis Approach To Solving the Signaling Game

Abstract

Decision analysis has traditionally been applied to choices under uncertainty involving a single decision maker. Game theory has been applied to solving games of strategic
interaction between two or more players. Building upon recent work of van Binsbergen and Marx (2007. Exploring relations between decision analysis and game theory.
Decision Anal. 4(1) 32–40.), this paper defines a modified decision-theoretic approach to solving games of strategic interaction between two players. Using this method, the
choices of the two players are modeled with separate decision trees comprised entirely of chance nodes. Optimal policies are reflected in the probabilities in the decision trees of each player. In many cases, the optimal strategy for each player can be obtained by rolling back the opponent’s decision tree. Results are demonstrated for the multi-stage signaling game, which is difficult to model using decision nodes to represent strategies,as in the approach of van Binsbergen and Marx.